Yuan devaluation could trigger coal exports by world's biggest buyer

LONDON: China's devaluation of the yuan may hit already oversupplied world commodity markets, as the surprise move increases the chances that the world's biggest coal importer will become a net exporter.

That would not help global coal prices, already at their lowest for almost a decade.

It would not be the first time such a reversal has occurred. China was one of the world's largest thermal coal exporters until around 2004 when rocketing demand at home helped drive the need for imports.

China had been forecast to continue as a coal importer as the currencies of other major producers had been expected to weaken against the US dollar, while the yuan had been expected to remain firm, making Chinese exports less competitive.

But faced with a run of weak economic data, China pushed down the value of the yuan this week, drawing accusations that it was unfairly supporting its exporters. The central bank says there is no basis for the yuan to fall further, but markets expect that could happen.

"A week ago people would have said there was a slim chance China would become a net exporter... now people are reconsidering that and they think it could potentially happen on a five year view," said Stefan Ljubisavljevic, analyst at Macquarie Bank.

"If you saw more protectionism of the domestic industry and devaluation continued, it could happen even sooner that China exports."

Chinese coal imports have already fallen sharply in 2015, due to the government's concerns over the environmental impact of coal power generation and its desire to help financially distressed domestic coal producers.

China's coal industry, which meets around 65 percent of the country's primary energy demand and employs nearly 6 million people, has been hit by a slowdown in sectors such as power generation, cement and steel, as well as a campaign to cut smog.

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"Their main aim is to get the domestic coal industry on surer footing in the first instance, but if they manage to go some way towards doing that and exports are viable following currency devaluation, then it (exports) certainly looks much more likely than it did a week ago," Ljubisavljevic said.

Potential export markets could include major coal buyers Japan, India and South Korea.

This week's devaluation alone, however, is not expected to suddenly unleash a barrage of exports.

Tang Jiabin of Everbright Securities said "the depreciation has little impact on coal exports, which are negligible compared to imports" but by making imported coal a little more expensive it could ease pressure on domestic producers to cut prices.

Wang Fei, an industry analyst with China's Huaan Futures, said, "From the point of view of prices, domestic coal could rise a little as a result of the depreciation, so on the whole, it will be beneficial. The impact will be a gradual process."

China's central bank, which had described the devaluation as a one-off step to make the yuan more responsive to market forces, sought to reassure financial markets that it was not embarking on a steady depreciation.

"The real question is whether it's a one-off adjustment and the currency goes back to being stable around here," said a trader.

However, a Reuters poll showed the yuan is expected to weaken by about one percent in the coming year after the central bank's move.

"It's bearish for the international market because it makes Chinese domestic coal cheaper than everything else and reduces their ability to pay in US dollar terms," a second trader said.

Benchmark European API2 coal futures fell to their lowest level in nearly a decade on Thursday, dipping to $53.90 per tonne.

Traders noted however that while the currency move made potential Chinese coal exports more competitive, the government would also need to reduce taxes by either removing VAT or introducing a rebate for coal exports.

"If they change the VAT policy then all bets are off," the trader added.